Last month I posted a blog about the Department of Labor working to come up with definitive criteria for determining if a worker is an employee or independent contractor. The DOL made their final ruling on January 6, 2021 and the rule goes into effect on March 8, 2021 - just enough time to get any current contracts revised, if necessary.
I had stumbled upon the DOL's request for public comment in late September, just days after it was posted. A client was re-working contracts with several people, so the timing was perfect. I reviewed the Department of Labor's 140-page document, which included where they were leaning for their ruling. I developed a series of questions for my client and his workers to ask to determine if their status as independent contractor was accurate or not. Sure enough - it wasn't.
Both my client and his workers wanted to maintain their independent contractor status, and so they used my series of questions and the pending criteria to update the contracts. It's a good thing the final ruling is the same!
Even though the sample contract I wrote up and share is for a massage therapist, this ruling applies across all sectors. If you are an independent contractor, I highly recommend you review your current contracts to make sure they are in line with the Department of Labor.
The Six Factors To Determine Employment Status
You can read the Final Rule at the DOL website, or download this PDF. If you aren't into reading small type that is laid out in three columns on 81 pages, maybe go read that previous blog post. If you'd rather not take my word for it, below is the language straight from section 795.105 of the final ruling, which is page 79 of the PDF version.
Core Criteria in the Economic Realities Test
If you can answer both questions with a definitive YES, then you are an independent contract. If both answers are clearly NO, then you are an employee.
1. The nature and degree of control over the work.
"This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors. In contrast, this factor weighs in favor of the individual being an employee under the Act to the extent the potential employer, as opposed to the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual's schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer. Requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the Act."
2. The individual's opportunity for profit or loss.
This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. While the effects of the individual's exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or faster.
The Other Factors
3. The amount of skill required for the work.
This factor weighs in favor of the individual being an independent contractor to the extent the work at issue requires specialized training or skill that the potential employer does not provide. This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job.
4. The degree of permanence of the working relationship between the individual and the potential employer.
This factor weighs in favor of the individual being an independent contractor to the extent the work relationship is by design definite in duration or sporadic, which may include regularly occurring fixed periods of work, although the seasonal nature of work by itself would not necessarily indicate independent contractor classification. This factor weighs in favor of the individual being an employee to the extent the work relationship is instead by design indefinite in duration or continuous.
5. Whether the work is part of an integrated unit of production.
This factor weighs in favor of the individual being an employee to the extent his or her work is a component of the potential employer's integrated production process for a good or service. This factor weighs in favor of an individual being an independent contractor to the extent his or her work is segregable from the potential employer's production process. This factor is different from the concept of the importance or centrality of the individual's work to the potential employer's business.
6. Additional factors.
Additional factors may be relevant in determining whether an individual is an employee or independent contractor for purposes of the FLSA, but only if the factors in some way indicate whether the individual is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.
Additional Information & Resources at USDOL Wage & Hours Department
If you want to know more, the USDOL has provided this Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act
New Mexico Division of the Department of Labor has an Investigations Manual used to guide investigators. It has lots of detail and useful info.
Timesheet App - I actually use this app to track work for all my clients. It's intuitive and reliable.
elaws Advisors - interactive e-tools that provide easy-to-understand information about a number of federal employment laws. Each Advisor simulates the interaction you might have with an employment law expert. It asks questions and provides answers based on responses given. This can be beneficial to both employers and workers.
“Know Your Rights” Video Series - available in Spanish and English
Compliance Toolkits - step-by-step guides to help employers ensure they are not violating workers' rights.
Payroll Audit Independent Determination (PAID) - employers are encouraged to conduct audits and, if they discover overtime or minimum wage violations, to self-report those violations. Employers may then work in good faith with WHD to correct their mistakes and to quickly provide 100% of the back wages due to their affected employees.
Resources for Specific Industries - varied resources are available for a wide range of industries
Offices of the U.S. Department of Labor
Bureau of Labor Statistics (BLS) - measures labor market activity, working conditions, price changes, and productivity in the U.S. economy to support public and private decision making.
Employee Benefits Security Administration (EBSA) - assures the security of the retirement, health and other workplace related benefits of America's workers and their families.
Occupational Safety and Health Administration (OSHA) - ensures safe and healthful working conditions for working men and women by setting and enforcing standards and by providing training, outreach, education and assistance.
Office of Disability Employment Policy (ODEP) - develops and influences policies and practices that increase the number and quality of employment opportunities for people with disabilities.
Office of Federal Contract Compliance Programs (OFCCP) - holds those who do business with the federal government (contractors and subcontractors) responsible for complying with the legal requirement to take affirmative action and not discriminate on the basis of race, color, sex, sexual orientation, gender identity, religion, national origin, disability, or status as a protected veteran.
Office of Inspector General (OIG) - conducts audits to review the effectiveness, efficiency, economy, and integrity of all DOL programs and operations, including those performed by its contractors and grantees.
Office of Labor-Management Standards (OLMS) - administers and enforces most provisions of the Labor-Management Reporting and Disclosure Act of 1959 (LMRDA). The LMRDA primarily promotes union democracy and financial integrity in private sector labor unions through standards for union officer elections and union trusteeships and safeguards for union assets. Additionally, the LMRDA promotes labor union and labor-management transparency through reporting and disclosure requirements for labor unions and their officials, employers, labor relations consultants, and surety companies.
Office of Workers' Compensation Programs (OWCP) - administers four major disability compensation programs that provide wage replacement benefits, medical treatment, vocational rehabilitation and other benefits to certain workers or their dependents who experience work-related injury or occupational disease.
Wage and Hours Division (WHD) - promotes and achieves compliance with labor standards to protect and enhance the welfare of the nation's workforce.
Women's Bureau - develops policies and standards and conducts inquiries to safeguard the interests of working women; to advocate for their equality and economic security for themselves and their families; and to promote quality work environments.
New Mexico Department of Workforce Solutions - Works with the U.S. Department of Labor and handles more than unemployment, including: AmericCorps & New Mexico Commission on Community Volunteerism, Economic Research & Analysis, Employment Services, Labor Relations, Human Rights (Discrimination), and Workforce Technology
Now, go forth and either demand your rights as an employee or update your contracts!